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The European Central Bank Leaves Interest Rates Unchanged

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Andrew R. Michaud

January 25, 2024

The European Central Bank (ECB) has decided to keep interest rates unchanged for the time being. This decision comes at a critical moment, as both the ECB and the U.S. Federal Reserve face the dilemma of when to start reducing borrowing costs.

While there is currently no urgency to cut rates in Europe, the outlook for economic growth remains weak. Additionally, inflation is rapidly slowing down, which will soon put more pressure on the ECB.

In a statement, the ECB made it clear that their focus is on ensuring that inflation returns to its medium-term target of 2% in a timely manner. They also emphasized that future decisions regarding policy rates will be set at sufficiently restrictive levels for as long as necessary.

It is important to note that the ECB's approach is data dependent, indicating that they will closely monitor relevant economic indicators before taking any further action.

ECB President Christine Lagarde recently stated that while the interest rate may have reached its peak, it is unlikely that the central bank will consider cutting rates until the summer. Lagarde explained that officials want to assess whether inflation remains low and if wage increases can be effectively contained over the next few months.

Meanwhile, the ECB's decision comes just a week before the upcoming rate-setting meeting of the U.S. Federal Reserve, where it is also expected that no changes will be made to current policies. Market predictions now suggest that the first rate cut by the Fed will likely occur in May instead of March.

Looking ahead, the ECB does not anticipate inflation to reach its 2% target until 2025. In December, the inflation rate briefly rose to 2.9%, up from 2.4% the previous month. However, it is worth noting that inflation has significantly decreased since it peaked at over 10% in October 2022.

Simultaneously, growth prospects for the eurozone remain modest. The ECB expects a modest expansion of 0.8% this year, following a meager 0.6% growth in 2023.

For now, the ECB does not plan to revise its projections at this meeting.